Here is a clarification from the CA Franchise Tax Board, see http://www.ftb.ca.gov/professionals/taxnews/2009/September/Article_1.shtml>
Clarification of the “Cash for Clunkers” Tax Rules
The federal “Cash for Clunkers” program has generated a lot of interest among consumers and
we have received many inquires about the tax implications of this popular program. As a result,
we are clarifying state tax rules for people who trade in their used vehicle under the “Cash for
Clunkers” program.
The “Cash for Clunkers” program, Federal law, H.R. 2346, The Consumer Assistance to
Recycle and Save Program, allows qualifying consumers to receive a $3,500 or $4,500 voucher
from the federal government when they trade in qualifying old vehicles and purchase or lease a
new one. This federal law provides the value of the voucher received by the consumer is not
considered as gross income of the purchaser for purposes of the federal income tax.
California law does not conform to H.R. 2346. For state income tax purposes trade-ins are
treated as normal sales or exchanges, and in some cases the value of the voucher received
may be subject to state tax. That is to say, the person subtracts his or her basis (generally the
cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher
amount, plus any other salvage value the dealer offers as part of the exchange) to determine
whether a gain or loss was realized on the disposition of the used vehicle. For example, if the
family car was originally purchased for $19,500 and traded in for a $4,500 discount under the
“Cash for Clunkers” program, there is no taxable gain. The $15,000 difference is a personal loss
under tax law and may not be deducted for tax purposes. However, if the family car was
purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to
be reported as income for state tax purposes.
Different tax rules apply for vehicles used in a person’s trade or business. For example, when a
person trades in the old company truck for a new company truck, under the “Cash for Clunkers”
program, the gain or loss could be postponed for tax purposes under the “like-kind
exchange” rules.
Any scrap value received by the consumer for the trade-ins is also used in computing the gain
or loss from these sales or exchange transactions.
We will provide instructions about how to report taxable gains for the “Cash for Clunkers”
program in its tax return instructions when the 2009 tax forms are published later this year.
Taxpayers and practitioners can check FTB’s website at ftb.ca.gov for tax forms and other
helpful information.
